Tyler Cowen wrote:
How or whether do equity holdings give the government "upside" in eventual bank recovery? Holding equity yields nothing if the banks never recover. If the banks will recover, you would think a loan from the Fed would suffice. But we've already tried that. So what exactly are the assumptions here? Somehow it is the Fed/Treasury actions which *cause* the banks to recover. How does that happen? They overpay for the loans at mysterious prices? That just puts the Dodd plan back into all the problems of the Paulson plan. If the government ends up overpaying for loans in the Dodd plan, and then someday gets 20 percent of that overpayment back through its equity share, is not a huge positive advertisement. (Isn't simply "knowing when to stop the subsidies" the best way to protect the taxpayers?) And in the meantime, what kind of credit guarantees is the government offering these banks and their creditors? It is easy to say that the Paulson plan is worse. (Oddly I think the Paulson plan makes most sense in Paul Krugman's multiple equilibria model for asset values.) But you shouldn't think that the Dodd plan is very good. Most of the Dodd plan boosterism I've seen doesn't look very closely at how it actually going to work. There's lots of talk about justice and the taxpayers getting upside and then a reference to the RFC from the New Deal. http://www.marginalrevolution.com/marginalrevolution/2008/09/paulson-plan-vs.html Mark Thoma: So, by having the government take a share of any upside, the result may be less willingness of the private sector to participate in recapitalization." http://economistsview.typepad.com/economistsview/2008/09/hold-to-maturit.html _______________________________________________ http://www.mccmedia.com/mailman/listinfo/brin-l
